Title Insurance: Why you Need It, and How to Shop for it

by : Mark Sumpter

The buyer pays the premium at the time of closing. Title insurance protects against loss arising from problems connected to the title to your property. Before you purchased the house it may have gone through several ownership changes, and the land on which it stands might have gone through many more. There may be a weak link at any point in that chain that could pop up to cause trouble. For example, someone along the way may have forged a signature in transferring title. Or there may be unpaid real estate taxes or other liens. Title insurance covers the insured party for any claims and legal fees that arise out of such problems.

Title insurance protects against losses arising from events that occurred prior to the date of the policy. Coverage ends on the day the policy is issued and extends backward in time for an indefinite period. (This is in stark contrast to property or life insurance, which protect against losses resulting from events that occur after the policy is issued, for a specified period into the future.)

The title insurance required protects the lender up to the amount of the mortgage, but it doesn't protect your equity in the property. For that you need an owner's title policy for the full value of the home. In many areas, sellers pay for owner policies as part of their obligation to deliver good title to the buyer. In other areas, borrowers must buy it as an add-on to the lender policy. I recommend doing this because the additional cost, above the cost of the lender policy you have to get, is relatively small.

Protection under an owner's policy lasts as long as the owner or any heirs have an interest in or any obligation with regard to the property. When they sell, however, the lender will require the purchaser to obtain a new policy. That protects the lender against any liens or other claims against the property that may have arisen since the date of the previous policy - in other words, against something you may have done.

For example, if the contractor you failed to pay for remodeling your kitchen places a lien on your home, you are not protected by your title policy: the lien was placed after the date of the policy. You will probably be required to get the lien removed before you can sell the property. But in the event the lien hasn't been removed and a search has failed to uncover it, the new lender will be protected by a new policy.

You can shop around for title insurance. Unlike mortgage insurance, where the carrier is always selected by the lender, borrowers can select the title insurance carrier. Few do, however. Most leave it up to one of the professionals with whom they're dealing: the real estate agent, the lender, or their attorney. This means that competition among title insurers is largely directed toward these professionals who can direct business rather than toward borrowers.

And it can pay to shop around. It's difficult to generalize because market conditions vary state by state, and sometimes within states. I would certainly shop in states that do not regulate title insurance rates: Alabama, District of Columbia, Georgia, Hawaii, Illinois, Indiana, Massachusetts, Oklahoma, and West Virginia.

You would be wasting your time shopping in Texas and New Mexico, because these state set the prices for all carriers. Florida also sets title insurance premiums but not other title-related charges, which can vary.

In the remaining states it may or may not pay to shop. Insurance premiums are the same for all carriers in 'rating bureau states': Pennsylvania, New York, New Jersey, Ohio, and Delaware. These states authorize title insurers to file for approval of a single rate schedule for all carriers through a cooperative entity. Yet in some there may be flexibility in title-related charges. More promising are 'file and use' states - all those not mentioned above - that permit premiums to vary between insurers.

It's a good idea to ask an informed but disinterested person whether it pays to shop in the area where the property is located. Just keep in mind that those likely to be the best informed are also likely to have an interest in directing your business in the direction that's to their advantage.

Title insurance protects against losses that might occur due to another party claiming ownership of the property.

Title insurance covers:

* Issues missed by the title examiner
* Issues missed when a deed or other public document is determined to be invalid or forged
* Liens from unpaid taxes or from a former owner.

Title insurance will pay your legal fees if you have to go to court to defend the deed, and if you lose the property, the title insurance will cover your loss up to the amount of the policy.

Keep in mind that if you've owned the property for a few years and it has risen in value, the title insurance policy you purchased at closing will only reimburse you for the original amount, not for the new value of the property.

You may be thinking, 'Wait a minute... if I pay an attorney to perform a title search, why do I need title insurance? Isn't it his or her job to make sure the title is clear?' Yes, it is... but unexpected problems can pop up - title insurance is a cheap way to avoid the cost of major problems that could pop up.